SECURE Act Alters Retirement Landscape

The SECURE Act, included in the year-end appropriations bill, should prompt clients to review beneficiary designations on their qualified retirement accounts.  The Setting Every Community Up for Retirement Enhancement Act affects how clients save going forward and how they leave their assets at death.  Under the SECURE Act:

• Required minimum distributions can be postponed for some clients.  Those who turn age 70½ after 2019 will have until the year they turn age 72 to begin mandatory withdrawals.
  
• Individuals with earned income can continue making contributions to deductible IRAs until age 72.
• A new 10-year distribution window eliminates the stretch-IRA for most death beneficiaries. With the exception of surviving spouses, the disabled, “chronically ill individuals” and those not more than 10 years younger than the IRA owner, all beneficiaries will have to empty the retirement accounts within 10 years.  Previously, non-designated beneficiaries had five years to deplete the accounts. Minors named as beneficiaries will have 10 years after reaching the age of majority to take the withdrawals.
• IRA owners will still be able to make qualified charitable distributions (QCDs) from IRAs starting at age 70½, even though they may not have to take required minimum distributions until age 72.  However, if the donor continues working and making contributions to an IRA, the maximum QCD is reduced by the amount of the deductible IRA contribution.  Donors generally may give up to $100,000 annually through QCDs.
• Certain part-time employees will be eligible to participate in 401(k) plans offered by their employers.
• The kiddie tax, which applies to the unearned income of children under age 19 and most students under age 24, will once again be taxed at the parents’ highest tax rate.  Under the Tax Cuts and Jobs Act of 2017, the tax rate for trusts and estates had applied to the income in excess of $2,200 (in 2019 and 2020).  The top 37% rate applies to income in excess of only $12,950 in 2020.  As a result of the compressed tax rates, many low- and middle-income children were subject to higher taxes than Congress intended (e.g., on survivor benefits for Gold Star families).  To avoid this, income subject to the kiddie tax will once again be taxed at the parents’ rates.

With the near demise of the stretch-IRA, clients with philanthropic interests might consider ways to provide payments for life to beneficiaries, with future benefit for charity.  For example, a parent might have part or all of a retirement account pass to charity in exchange for a charitable gift annuity for a child.  There is no immediate income tax when the funds pass to charity.  If the child is younger than the charity’s minimum age to establish a gift annuity, a deferred payment annuity might be arranged, with larger payments beginning at some future date.  The child will be entitled to payments for life.  The same result could be accomplished if the IRA passes to a charitable remainder trust that pays income for the beneficiary’s life or a term of up to 20 years.  If the client’s estate is subject to tax (estates in excess of $11.58 million in 2020), a charitable deduction is available for the value of charity’s interest.

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